For the third consecutive year, the world economy is in a state of malaise, and little improvement is expected over the 1.9% growth registered last year. With the advanced economies struggling to get out of the slump, "the world economy is now facing a widening deflationary gap created by deficient global demand", says UNCTAD´s Trade and Development Report 2003 (1), released today. "There is a global glut in both labour and product markets, with too many goods chasing too few buyers and too many workers chasing too few jobs."
Despite some improvement in consumer and business confidence, the developed economies look set to repeat their substandard performance (under 2%) of the past two years, with more favourable forecasts resting on the long-anticipated rebound in the United States happening in the second half of this year. But with a real turnaround requiring all countries firing together, UNCTAD urges Europe and Japan to adopt a more aggressive macroeconomic policy stance.
The Report notes that in spite of the sizeable interest rate cuts by the Federal Reserve, US investment has still not recovered as expected and the labour market is in its worst shape for some time. The economy has avoided a prolonged period of recession thanks only to continued growth in consumer spending boosted by mortgage refinancing - which injected $100 billion of consumer demand into the economy last year. But with smaller wage rises, falling employment and exploding levels of private and public indebtedness, this is not a long-term solution. The current recovery is already beginning to resemble the "double dip, jobless recovery" of the early 1990s, and the Report warns that "the danger facing the United States economy is that the imbalances and excesses created during the boom of the 1990s could result in a long period of unstable and sluggish growth, with occasional surges as well as dips".
Europe is set to repeat a growth rate of around 1% this year, largely due to weak consumption demand in all the major economies. And with Europe´s ability to respond vigorously to the downturn restricted by the Stability and Growth Pact and by the reluctance of the European Central Bank to fight deflationary tendencies as aggressively as inflation, the pattern of recent years looks set to continue. Given that real wages have been lagging behind productivity since the early 1990s, the solution cannot, according to the Report, come from wage-cutting. Rather, now is the time for the EU to find ways to exploit its greater scope for expansionary monetary and fiscal action to bolster growth.
Another year of near-zero growth in Japan, thanks to stagnant investment and consumer spending, will be accompanied by an underlying tendency to price deflation. Nominal interest rates are hovering around their technical minimum, leading to emphasis on international competitiveness and exports as the main spur to growth and to efforts being focused on preventing any real appreciation of the yen. Such a response is unlikely to bring about a broader global recovery.
Given the differential policy responses to slowdown and continuing disparities in the strength of demand among the major industrial countries, the huge payments imbalances that emerged in the 1990s have persisted or intensified, with increasing pressure and attention on currency markets. According to the Report, the danger is that currency adjustments "will only serve to redistribute the deflationary gap and unemployment among countries without bringing much support to global recovery". Indeed, the recent appreciation of the euro, coupled with the stability of the dollar against many of the countries with which the US runs a trade deficit, may actually increase imbalances, adding to the volatility of capital flows and putting further downward pressure on prices.
The Report concludes that only coordinated expansionary policies among the leading economies can bring about an orderly rebalancing of economic relations. UNCTAD worries that "if decisive action is not taken to restore stability in financial and currency markets, to start a global recovery and reverse the rapid rise in unemployment, there is a real threat that trade imbalances and the coexistence of continued rapid growth in some parts of the world with stagnation, decline and job losses elsewhere could deepen the existing discontent with globalization among a wide section of the world´s population, triggering a political backlash and a loss of faith in markets and openness".